DB Plan Sponsors Using Different Strategies for Cost, Funding Measures

For defined benefit (DB) plans
included in a PwC study, the 2016 median discount rate decreased 20
basis points since 2015 (from 4.30% to 4.10%) and has decreased more
than two full percentage points since 2007 (from 6.25%), reflecting the
low interest rate environment of the past decade.

Median
plan funding levels remained unchanged from 2015, with pension plan
assets equal to approximately 82% of the projected benefit obligation
(PBO) in 2016 and 2015. In 2007, the median funded ratio was 100%. If
interest rates were to return to 2007 levels, PwC estimates the median
funded ratio would increase to roughly 110%.

Median deferred
losses for pension plans in the study remained unchanged at 33% of the
projected benefit obligation at the end of both 2015 and 2016. Of the 89
companies that defer recognition of gains/losses, 87 were in a loss
position at 12/31/2016.

Median 2016 asset allocations for pension
plans in the study were generally consistent with 2015 allocations at
40% equity, 39% debt/fixed income, and 16% other in 2016, compared to
39% equity, 40% debt/fixed income, and 15% other in 2015. In 2007, the
median values were 64% equity, 29% debt/fixed income, and 5% other.

NEXT: Changing trends in DB plan measurements

According to the study report, until recently, most companies used a
single discount rate approach—a single weighted average discount rate
determined from measurement of the projected benefit obligation was also
used to measure the interest cost and service cost components of
benefit cost. However, beginning in 2015, many companies adopted an
alternative approach, with separate measurement of the projected benefit
obligation, interest cost, and service cost. Under this approach,
individual spot rates from a yield curve are matched with the respective
future cash flows. This results in different weighted average discount
rates for the projected benefit obligation, interest cost and service
cost.

Of the 100 companies in the study, 36 disclosed adopting a
multiple discount rate method at year-end 2016, an increase from
year-end 2015 when 25 companies disclosed using such method.

PwC
says another key component of net benefit cost is the gain or loss
resulting from changes in assumptions or actual experience different
from assumptions (for example, mortality, returns on plan assets,
discount rates). Most companies defer recognition of these gains and
losses through accumulated other comprehensive income and amortize them
to income over future periods.

However, PwC found over the last
few years, some companies have elected instead to immediately recognize
these gains and losses in income (sometimes referred to as a mark-to-market approach).
Of the 100 study companies, eight disclosed using a full mark-to-market
approach, in which all gains or losses are recognized in income in the
year they occur. Further, three companies disclosed using a partial
mark-to-market approach, in which gains or losses only in excess of a
corridor (10% of the greater of beginning of year PBO and asset values)
are recognized immediately. The number of companies using a
mark-to-market approach is consistent with the prior year.

The study also found the number of companies that had frozen their
funded pension plans has been increasing each year. Based on information
disclosed in the study data collected, in 2007 only one company had
disclosed a frozen plan or plans, compared to 20 companies in 2015 and
21 companies in 2016. PwC concedes that these numbers may be
understated, since for some companies in the study it was unable to
determine based on their disclosures whether the company had frozen one
or more pension plans.